Rocket Lab Corporation (RKLB) Earnings Call Transcript & Summary

Well, great. Good afternoon, everyone, and thank you for joining our 3:45 p.m. session with Rocket Lab. I'm Kristine Liwag, Morgan Stanley's aerospace defense analyst. And I'm excited to have Adam Spice, CFO of Rocket Lab, with us today. Welcome, Adam.

Thanks for having me.

Great. Before we kick off, the standard disclosures. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley representative. Very important website. Save it on your bookmark.

So maybe, Adam, kicking off, let's start with launch. I mean launch has been pretty topical in the industry lately, mostly because of the shortage of rocket launch capability. At this point, Electron is the second most used launch in the U.S., and you're developing a new medium-class rocket, Neutron, which you're planning to launch towards the middle of next year. Can you talk about the demand environment? What makes customers choose Electron? And when you look at Neutron, why go with the medium rocket? And how do you think the demand environment shifts over time? And frankly, the question is really related also to kind of the white elephant not in the room, SpaceX. Investors are asking, is there room for small launch, medium launch and what SpaceX is doing, which is really more on the heavy and the super heavy?

Right. No, it's a great way to start the conversation. So as you can imagine, the CFO of a rocket company has lots of things to keep them up at night, lots of things. But demand really isn't one. So I would say the demand environment is, right now, we obviously have greatest visibility in the small dedicated launch side of the market where Electron is the leading small dedicated launcher. We've launched it 52 times. We've got another launch coming up on the 17th. So they seem to be coming at a pretty good clip now. And Electron is a phenomenal vehicle. It allowed affordable small dedicated launch, whereas in -- before Electron came along, probably the closest kind of analog to Electron would have been a Minotaur or Pegasus launch from Northrop Grumman, which would run you $40 million to $50 million, that didn't fly very often. Now you can get an Electron launch for around $8 million depending on kind of what your needs are. But our backlog right now is priced around $8.2 million. So -- and if you wanted to do something on, for example, on a Falcon 9, you'd pay close to $70 million for a dedicated launch. And so when you're putting a classified or a payload that's going to have very unique orbital insertion location, you have to have dedicated launch. And so we offered a very efficient, almost an order of magnitude cheaper than what the other options were out there. And we continue to see that demand growing. We've got more than 36, I think the last count we have 36 electrons in backlog at this point. This year, we'll launch between 15 and 18x. Last year, we launched 10x. So the demand keeps growing. And we don't see that stopping. And I think what Electron is great for is for doing small constellation deployments or pathfinder missions, where you're testing to see if the technology is going to work on orbit, you're not really quite ready yet to go full-scale operation where you need a larger launch vehicle to deploy at constellation. So Electron has been very, very useful for that. We've now found applications for it in hypersonic test campaigns as well. So now it's more from just being a satellite deployer to now also a hypersonic test bed platform. And that's actually growing. That's probably the fastest-growing part of our Electron portfolio right now. But then you kind of think about medium launch and what's the driver for Neutron. And there's really a couple of drivers for Neutron. So we do all this great work to do the Pathfinder missions on Electron. We actually design, build satellites, full satellite systems for customers, and then we hand those off to a larger launcher like SpaceX. Whereas if you really look at our long-term strategic vision of being an end-to-end space company, we want to own everything, right? And so in order for us to really kind of take full advantage of that growing space market, we don't want to be pinned down to just a small subset, even on the launch side. And then if you do the satellite design and build, you have a greater chance of optimizing things for your own launch vehicle, so we can really kind of offer customers that advantage of that full solution. And I think probably you mentioned what's not in the room. I mean SpaceX essentially has a monopoly right now on medium-class launch. And that's a very uncomfortable place for the market to be. It's very uncomfortable for government customers. It's very uncomfortable for commercial customers, particularly commercial customers that have competing offerings to Starlink. As you can just imagine how uncomfortable that would be if you're kind of a very direct competitor to Starlink and all of a sudden now you're handing over your baby to your competitor because when you do a launch, you're handing over your spacecraft, you're very exposed, right? And then -- so I think the market just needs alternatives. And right now, there is no alternative to medium launch. So we think that Neutron is not just going to be another solution. We think it's going to be the most optimized, most cost-effective vehicle out there because Electron -- sorry, Neutron has been designed from ground up in the last 4 years whereas Falcon 9 was designed 20 years ago, and it's been iterated, it's a great vehicle. But we think we can bring something new and innovative to the market in addition to just more capacity and choice.

That's really helpful, Adam. And looking back at Electron, 300 kilograms of payload; Neutron, 8,000 kilograms; you're looking at what Falcon 9 at 22,800 kilograms. I mean there's still a fairly big size between Neutron and Falcon 9. When you think about the marketplace, you made an obvious case for Electron where it's truly -- to be pathfinder, you're not ready for full scale, and it's cheap for that access point. But why would customers want to choose Neutron over Falcon 9? Is that the real comparison? And then also if Neutron costs come down enough, could we see a cannibalization from Electron? Can you describe the relationship between the customer decision to use one over the other? But you do make a great point that a monopolistic offering is not necessarily desired. You want to have options. It sucks to be the stranded astronauts on the ISS.

That's true.

Wish they had another option to come back home, right? But I think understanding the differences would be helpful. And how are your customers thinking about that?

Sure. Well, I think just to clarify, too. So Electron, it's got -- sorry, Neutron has several different modes, if you will. If you think of -- if we're going a down-range landing comparable to a Falcon 9 in the numbers you mentioned, it will actually deploy 13-ton. So 8-ton is reusable back to the pad. So you could think about 15-ton expendable, 13-ton return -- down-range landing, 8-ton return directly to the pad. So it's got different ways. So when you get to the 13-ton reusable, that's really more of the comparison to Falcon 9. So when you think about how the customers are making their decisions, a lot of it's -- again, right now, from what we see hearing back to the customers, if you want to get on a Falcon 9 launch, you're looking at a 2-year waiting list, right? So it's -- there's just -- the capacity is very constrained. People have been looking for more capacity to come on the market. You can just look at, for example, Amazon Kuiper is one of the biggest new constellations that's coming along, and they basically entered into -- launched different agreements with 3 vendors: Blue Origin, Ariane 6 and ULA. And all -- for all those 3 operators, they're launching on -- they will be launching on a new vehicle, right? So Vulcan has launched once, Ariane 6 has launched once and Blue is yet to launch their New Glenn. So that kind of tells you kind of what the state of the market is when there's -- the choices that are being made are for things that don't have a lot of heritage or, in some cases, any heritage. So heritage is super important. I think that's really one of the huge advantages that Electron has is that we've launched it 52 times. We've got a great success rate. We're taking a lot of that technology and embedding it into Neutron. Again, things that we're taking forward were to derisk the program are -- we've got tremendous experience with carbon composite structures, right? So tanks, structures, fairings, that's being leveraged from what we've done with Electron. On the avionics side, that's just scaling from Electron because the electronics don't really care whether it's 300-kg payload cable rocket or a 15-ton cable rocket. So we've managed to find ways to leverage what we've done very successfully in the past and really kind of, I would say, extend that heritage to a new vehicle. So I think a lot of customers that we're talking to now that are considering Neutron for launch, they don't really look at us like as an unproven, "Hey, will this work?" I think everyone takes it for granted. Neutron is going to work. I think the question is kind of what is the time frame for getting their payloads on orbit. And I think it's a little bit of a game where the customer doesn't want to commit to a rocket that might be late. And in our industry, late doesn't mean like a few months, late means years normally, right? So now they've got satellites ready to go, they committed to a rocket that it ultimately got the pad too late. Alternatively, we've had issues where we've had rockets ready to go and customers don't show up with their payloads because they've had an issue with their TVAC or what have you. So it's a really interesting dance that launch providers and satellite manufacturers and calculation operators have to basically do and it's just all got to come together. And so I think we do get a lot of credit for the heritage we bring from Electron. I think that's going to help us build a really healthy backlog for Neutron faster than you might see other kind of newcomers or even, not even newcomers, but people that have never scaled before in the same way. Because if you look at, for example, like ULA, never had a failure, great success rate, 150-plus launches, no failures. But it's historically been an expensive vehicle, and it hasn't launched all that frequently, right, between Atlas and Delta. So what we bring is the promise to be kind of another SpaceX alternative where you launch very effectively and cost effectively at a very high cadence. And that's really what the market needs right now. It needs cadence because there's just not enough capacity out there.

And so for cadence, I mean, how high in volume could Electron go?

Well, we originally scaled our factories to do a rocket, like a launch per week. So we have the footprint to be able to do 50 launches per year. I mean we can launch 128x out of New Zealand alone, right? We have a launchpad in New Zealand, plus we have launch facilities in Wallops Island, Virginia. So look, I don't think that we're going to be the limiting factor. Right now, right, we see demand, it's not hard to squint and see 20-plus, 30-plus launches per year. right now, we really don't see the demand for kind of 50 launches. So we didn't think -- we're not facilities limited, it's really kind of the market demand, just given where everything is very nascent still. Everyone has been waiting for this big hockey stick in the LEO market. And there's been a hockey stick, but to date, the biggest hockey stick has come from SpaceX Starlink, which nobody gets to participate in. So there's been this huge industry changing and huge step-up in volume, but it's been basically walled off to 1 provider, right? They make their own subsystems for their satellites. They make, obviously, their own rocket launch capabilities. So really, it's not been actionable for a lot of people in the ecosystem. I think when you start talking about other platforms, like whether it's the FDA platforms for the government, whether it's things like Kuiper and so forth, those are really -- represent the real opportunity to grow the ecosystem in a much more meaningful way where there's more people that can play in those opportunities.

Yes. I mean what you said is real. I don't think people realize more than half of satellites orbiting around Earth are Starlink satellites today.

6,000 of 9,000 are the numbers that I'm familiar with, right? So yes, it's a majority of the satellites that are out there. One person who's built them, launched them, it's really kind of stunning.

Great. And I think that's why the question from investors really is like is there room for companies outside of SpaceX? I mean you're making the good argument that at government customers don't want a monopoly. They want to have diversity of product, and that's what you're offering. So maybe going back towards profitability of Electron because it is an established alternative and you do have a customer book. The revenue recognition could be pretty lumpy for launch, right? But I don't think most investors understand that you actually receive most of the cash upfront before launch. So can you talk about the sales cycle of Electron revenue recognition method and cash? And also, at some point, what is mature profitability, cash profitability of an Electron launch?

So the launch business is very fixed cost-intensive, right? So you've got a lot of standing costs because whether you're making one rocket a month or 4 rockets a month, you could probably make 4 rockets a month with -- I would say the staffing part of it is maybe the most variable in that. But at the same time, you need a certain amount of baseline staff where you're making 1 or making 4. And so you want to put your labor to its most effective use of scale. But you have standing costs like your launch ranges. So whether you launch once or never, you still have those standing kind of fixed costs to man those. You've got health and safety teams. You've got all your quality teams. So the rocket business is very kind of fixed cost-intensive. So the fact that cadence is really probably the most important driver to your margin profile. So we've been fortunate, we're actually -- selling price has gone up. So ASPs have increased pretty steadily over the last several years. When I joined the company back in 2018, we were selling Electrons for about $5 million. Now our backlog is priced around $8.2 million. We've got some higher, some lower, depending on the mission requirements. So that's been a nice increase. Our production costs have gone way down. We've actually gotten quite a few -- quite a bit of efficiencies on, I would say, on the BOM side, right? So we've gotten better with things like yield and so forth and then bringing the labor hours down. But probably the biggest thing is just amortizing the cost of the building and the machinery and all the different things that we can kind of utilize over a greater number of units. So in the last quarter, I believe our non-GAAP and GAAP gross margins were pretty close, actually, call it in the low 30s. And we see a path, which is consistent when we talked about when we became public that we could see that being a 45- to 50-point gross margin business, right? And for us, let's say, cash margin is pretty similar. Like the only thing that we really have in our model that's a little bit different is like so we do have reasonable depreciation and amortization and a little bit of stock-based comp in the mix as well. But I think that's a product line that once we get to 2 launches per month, that's the sweet spot where we really can get focus on that kind of north of 40 points of gross margin contribution from that product line. And there's really not a lot of R&D going to that anymore. So a lot of that just flows to the bottom line.

And Adam, do you view the reusability to be, on the first stage, to be a factor to get to that higher gross margin? Or is this just volume and cost efficiency of manufacturing?

I think we can get there without reasonability now. I had my doubts before, but I think now if we were to get to a consistent cadence where we're launching if you're in the 30 launches per year range, I think pretty safely we could get there without reasonability. Reusability just kind of gives you an extra buffer. And what does that translate into? I think reusability probably adds maybe around 500 basis points of margin improvement once we get that kind of dialed in because you can't do reusability on every launch, right? It depends on the trajectories, right? How far offshore are you going? What's the payload requirements for the rocket? Because the recovery equipment actually consumes some of the master capability of the rocket, about 40 kg's worth. So if you've got a 300-kg payload that's going to take up the full capacity of the rocket, you can't really use a reusable version of it because you wouldn't have the capacity. So it's a mix, and we've kind of always been modeling around if we had 50% of our Electron launches to be reusable, that's kind of where that gets you into that kind of 50%-ish gross margin category, maybe a little bit above.

I see. And last year, you switched from the helicopter recovery, that was pretty cool to see you kind of catch the rocket with the 2 helicopters. You went from that to an ocean recovery, of ocean booster recovery. Can you talk about the decision, again, in hindsight, why you moved over to ocean recovery and then also how that's progressing? And is 50% a realistic run rate with the -- what you've experienced so far?

Yes. No, I'm confident that we're going to get to margins north of 40 points once we get the cadence up to at least, again, 2 rockets per month is kind of where we kind of get there. The recovery was interesting because helicopter -- nothing involving helicopters is straightforward. We're cheap. Yes, a helicopter is very expensive. And yes, I would say that we just figured out that we'll have a higher percentage of launches that can be recovered if we're using marine recovery because you can go further offshore. You have limitations of the helicopter, how far you can go before you got to run out of fuel and come back. So it just seemed like that was the kind of the better way to do it. We had to make some further investments in waterproofing the stage and so forth. But that seemed to be a pretty common sense thing for us to do to increase the percentage of admissions that we could actually go after recovery on and just an ease of use, if you will. And just coming back to your question, I don't think I answered your question on kind of the rev rec and so forth. So you're absolutely right, rev rec on launch is challenging because it's basically point in time. So even though you're collecting cash against milestones as you're building the rocket for the customer and executing on the mission, you actually don't get to recognize the revenue until you actually push the intentional ignition button. But at that point, you've collected 90% of the cash, right? There's only typically 10% to go. And the way it works is by the time that we actually start bolting a rocket together, we've collected about 60% of the mission cash. So it's a pretty positive working capital model. Now things are going to get maybe even more lumpy with Neutron because now you're talking about an ASP that's, call it, $55 million, right? And you're still going to have that same lumpy revenue recognition model, still again, collecting the cash in advance. But that's one thing about launch is it's always going to be lumpy. It's going to be lumpy because of the way that you recognize the revenue, but it's also going to be lumpy because you're dependent on your customers showing up with their payload. And every customer that we work with, they want to get their stuff on orbit as fast as possible. So it's not like they're dragging their feet to deliver us a payload but the problem is they'll have a project plan that would say, hey, we can deliver the spacecraft in October. But then when it's going through its final testing in September or August, an issue comes up with a subsystem on the satellite. They got to take it out, they got it de-made. They got to do all kinds of things to fix it and then get it back to you. So all the best intentions in giving you schedule dates often can disappoint because you just -- space is hard and satellite, you just never know. Is the radio going to fail in TVAC? Or you're going to have some other issue that comes up. And so all you can do is -- all we can do is really be ready with a rocket ready to go. And fortunately, we really never had a customer waiting on a rocket. We've always had rockets ready waiting for satellites.

Thank you for that color. And maybe going back to pricing, I mean, 5 years -- a few years ago, you said it's a $5 million rocket, now it's $8.2 million. And also in that time period, the market had anticipated there would be more small launch providers in the market that aren't in existence anymore. So in terms of pricing, is $8.2 million the peak? Could you see further upside, especially since we haven't really seen any other successful, consistent small rocket providers out there?

Look, we are pushing the envelope. We want to -- we push price to the edge as far as we can. I think at some point, you start running into -- nothing in space, there's no free lunches in space, right? So when you think about competition, people say, well, you compete with transporter, right, for example, rideshare emissions, which is kind -- it is true at the end of the day because if we price Electron too high, at some point, they'll say, well, it's worth us making the investment and putting more propulsion on our spacecraft so that we can do orbit raises and maybe we can -- if we spend more in the spacecraft, we don't have to spend as much on getting a precise orbital insertion from the launch provider. So everything is a trade-off. So we're always trying to kind of find the limits of where we can price. And I think we've kind of it feels right. And I think given where kind of our margins are getting to, would we love to have 70 points of gross margin on Electron? Yes, that would be great. But I think given, again, the dynamics of the fixed cost nature of launch, volume probably is more important than trying to eke out the next few kind of hundreds of thousands of dollars on launch ASP.

Yes. But I mean, I guess, with Electron at the run rate of 2 per month at 40%, 50% gross margin with a similar cash margin, it's an attractive place for that program. So maybe shifting gears towards Neutron, I mean your sales approach has been different. I mean you and Peter had been very clear that when you approach Neutron, you don't want to do it the same way you did Electron in terms of getting low dollar value at the backlog. How is the strategy going? And when -- at what point, like how close to entering the service or launch service do you anticipate Neutron backlog to start building? And how has been the conversations with your potential customers?

I think the dynamics with Neutron are quite different than the dynamics that are in place with Electron. As you pointed out earlier, when Electron was coming to market, there were like 140 aspirational small launch companies.

Like the PowerPoint space companies?

Exactly. And so most of them didn't really influence pricing. They'd come up with some crazy pricing. What really did influence pricing for a while were people like Astra, right, and Virgin, who were teetering on the break of failure and they were just doing Hail Mary things and just -- that was uncomfortable, but they're gone now, right? So I think the great thing about this business is you can make all kinds of promises all day long, but at some point, you got to deliver a working rocket and you're fighting physics, and it's tough. I think with Neutron, we're finding there aren't 140 medium launch vehicles coming to market. There are very few number of existing -- we talked about Falcon 9 really being the only real operational high cadence vehicle today. I mean there are other people like there's a few others that are trying to put together programs. But we don't see the pricing pressure at all like we saw with Electron, right? Because the launch providers I mentioned earlier that are supporting Kuiper, for example, they're not necessarily known as being low-cost providers or high-cadence providers. It's really, in a lot of ways, SpaceX sets the market, right? And a Falcon 9 has historically recently gone for, again, off-the-shelf launch of $67 million to $70 million. So we feel pretty good about kind of the pricing dynamic. We don't really have any Kamikaze pricing out there at this point.

Great. Now moving from launch, I mean, you've talked about being a full provider space solutions business. And actually, the Space Systems business is a larger portion of the company now. Can you talk about the opportunities that you're seeing there? What are your core competencies? And you've built out this capability through acquisitions in the past few years. Where are you in the portfolio and where does this need to go to be the fully true end-to-end solution that you've highlighted earlier in your comments?

Yes. That's one part of the business. I always knew we were going to be successful in small launch. I would -- not a lot of doubt that we'll be successful in medium launch. The Space Systems stuff really kind of came out as a bit of a surprise to me how quickly that's grown. And not only how quickly, but the level of capabilities that we've kind of put together, again, some of it is organic, some of it is through acquisition. But the fact that now we're a prime contractor for U.S. government missions, right? That we -- like earlier this year, the $0.5 billion SDA...

I remember when you guys were building your skiff in your facility in California here.

Yes, it's amazing what's come along. So we're now priming really meaningful missions with very sophisticated spacecraft. I mean we just shipped a couple of weeks ago, it's been in the news quite a bit: our ESCAPADE spacecraft that are going to go to Mars, right? So one thing we've done, and Pete is very consistent, when he has a vision of how you actually put that vision into action, it's a lot of very practical steps along the way. And he's very, very disciplined in that way. And that he said, "Look, I want to basically -- every program that I take on with a customer not only don't want it to make money for the company, but it has to teach us something along the way that ultimately we're going to put to use for ourselves in putting our own assets on orbit and creating recurring revenue streams from that." Because ultimately, our vision for Rocket Lab really doesn't look all that dissimilar to the SpaceX vision of a super capable, reasonable launch vehicle with an application that you support with it. So certainly, Neutron is going to be used to deploy other people's payloads, but a big piece of that vision is to deploy our own payloads. So I think that, again, everything that we've done, the reason why we took on some of the early mission satellites that we built for NASA kind of paved the way. It gave us some capabilities for doing very high Delta V capabilities to deliver spacecraft into unique orbits like the moon and Mars. And then we took on programs that were unusual in the fact that they were operating in a very high LEO environment with harsh radiation conditions and long on-orbit life requirements and high uptime requirements for the type of applications that we're serving. And we took those capabilities, and now we're leveraging to the SDA platforms where there are other things that are unique about those that ultimately all of these things breadcrumb way into creating an IP portfolio that when we have Neutron that ultimately is the key to unlocking a constellation opportunity for us, that we'll be able to build the most sophisticated spacecraft in a very vertically integrated way and deploy those spacecrafts super efficiently on our own vehicle. That sounds a lot like SpaceX's model, right? It is essentially that model. And so at some point in time, we believe that, that value is going to be recognized because if you look at the value delta right now between ourselves and SpaceX, it's like 100x. And I think not too far from now, people are going to look and say, "Well, what's fundamentally different about these companies? What can SpaceX do that Rocket Lab really can't do?" And I think that's going to be increasingly less distinguishable over time.

I mean, look, SpaceX has 6,000 of the 9,000 satellites. How big could Rocket Labs constellation be?

Well, I think it really depends. I think right now, look, talking about constellations or getting specific about constellation is difficult to do before you have the launch vehicle because you can't do it without having that, right? So it's all -- that's why if people are going to say, well, why are people so focused on Neutron, right? Space Systems is a bigger business. Isn't that really shouldn't we be focused on the next big SDA contract or commercial satellite build contract? Well, I think really when you really dig down into it, they really recognize that Neutron is the enabler for the much, much bigger picture. I mean Starlink wouldn't be, in my opinion, it wouldn't be what it is today if they didn't have a reasonable Falcon 9, right? So all eyes are on Neutron, which is the appropriate place for them to be. Once that vehicle is in place, then I think the aperture of opportunities from a constellation perspective become much more clear.

So it seems like mid-next year, once Neutron is launching, I mean we should hear from you more about what that constellation vision could look like?

Yes. And look, I think it's not -- it doesn't necessarily have to be a completely organic greenfield opportunity, right? I think as a public company, we have a currency. We have the ability to bring value to constellations out there. If you can imagine like if you're a consultation operator, you've got a lot of things to do. You've got to have somebody design a spacecraft for you or you design it. And then you have to have somebody make it for you and you have to worry about supply chain complexity, then you have to go procure launch. Then you have to operate the satellite in orbit and all the ground station needs and so forth. And then you got to basically manage and analyze the data and deliver that to the end customer. At the end of the day, if you look at what we can provide is we can come in and say, well, tell you what, we can design the space graph. We can build the space graph. We could provide unfettered launch for those spacecraft. We can operate them on orbit, which allows the constellation to really do what they do best, which is manage the data and the customer, right? So I think when people think of like, well, everything we do might necessarily have to be organic. I don't think that's the case. I think there could be ample opportunities for inorganic growth and expansion into the applications market through inorganic ways.

Thanks, Adam. So we have time for 1 or 2 questions from the audience, if there are any. Just raise your hand. Okay. So with that, I mean, Adam, thank you for coming. We really appreciate all your questions. Good luck with Neutron. Looking forward to see that launch next year, and this concludes our Rocket Lab presentation.

Thank you.